Logistics operators argue that the amended directive of the National Bank of Ethiopia (NBE) on foreign currency earnings and retention is not putting in to account the services they are handling.
It is to be recalled that on March 9, 2021, NBE had amended the ‘retention and utilization of export earnings and inward remittances’ under directive no. FXD/70/2021.
One of the major changes on the revised directive was that exporters of goods and services as well as recipients of inward remittances shall have the right to retain only 45 percent of their export earnings and remittances in foreign currency indeterminately in a retention account after deduction of 30 percent surrender to NBE from the total earnings. These meant recipients shall use only 31.5 percent from the total amount they earned for unlimited timeframe after the deduction of 30 percent for NBE from the total amount and 55 percent after the deduction of NBE amount to banks. The banks share was an overall 38.5 percent from the total earnings.
In contrary, after the NBE deduction the previous directive gave a right for exporters of goods and services as well as recipients of inward remittances to retain thirty percent of the account balance for an indefinite period of time and the balance for up to 28 days. After the 28 days, any balance shall automatically be converted in the next working day into local currency by the customer’s ban using the prevailing buying exchange rate.
Logistics actors, who are mainly working on freight forwarding with their foreign investors, are arguing that the directive has induced an unnecessary pressure on their charge settlement that is supposed to be due at Djibouti.
One of the sector leaders told Capital that there are some logistics companies which are working with those investing in Ethiopia as foreign investors. He said that these logistics companies prefer to flow the service charge, which is in foreign currency, into Ethiopia than direct cost settlement for logistics charges. “We prefer to settle the charges via Ethiopian banks because we shall use the remaining amount for other local partner customers who are paying on birr to settle the cost in Djibouti,” he explained.
As a principle, NBE has a special arrangement for the allocation of foreign currency for port charges. It gives a right for the freight forwarding sector to access foreign currency and transfer port charges within seven days after the application, while the foreign currency shortage at banks push it up to three and more months.
Due to that logistics companies which are working with customers who are paying on foreign currency receive the commission via local banks and settle the port charge by themselves.
They reminded that more than 90 percent of the logistics service payment is not the earnings for Ethiopia. The amount is paid directly by clients to port and when payments are done via local banks freight forwarders are using the foreign currency reserve in order to settle the service charge for a given client and the balance for other local customers.
“After paying the due for port charge at Djibouti the balance which is a small amount is to be saved at local banks and shall be paid for other birr customers’ in the port service payment,” the sector experts said.
“However, the new directive has significantly reduced the amount that the hard currency generates thus placing them in pressure for extended arrears,” they claimed.
“After the NBE 30 percent deduction in the past we shall use the 70 percent for charges fee and for the remaining small amount we may save it under the 30 percent retain account for an indefinite period of time for the payment of other local customers payment at Djibouti,” they explained.
“Based on the new scheme for instance form USD 100 earnings the government (NBE and banks) totally deducted USD 68.5, which affects the logistics sector,” the sector operators added.
“Currently the amount we are using is reduced to 31.5 percent from the total earnings that is indirectly burdening the country on accrued foreign currency settlement for the port,” they say, adding, “the operation we used to follow was helping to ease the pressure on banks, while it has cut by the NBE new directive.”
The freight forwarding actors expressed that they are to put forward their expectation through their association, Ethiopian Freight Forwarders and Shipping Agents Association, in order to inform the matter to the NBE so as to arrive at a solution.
Freight forwarders express burden over NBE’s directive
Consultancy to follow after ‘securities market’ ratification
A consultant that has wide expertise in coming up with the idea of a startup capital is expected to be hired as the next stepwise procedure for the formation of the securities market.
Melese Minale, Senior Macroeconomic Advisor at the National Bank of Ethiopia (NBE), which is leading the formation process of the Capital Market Authority, a regulatory body for the upcoming security market, said that the next step after the ratification of the proclamation by parliament will be hiring a consultant to determine the formation process of the market and its startup capital.
According to the draft proclamation that is expected to be ratified before the end of the parliament session, the government or public enterprises share would not be higher than a quarter of the total capital of the securities market, also known as the secondary money market. However, it has stated that if there is less interest from the private sector that includes foreign investors, the government shall take more than 25 percent share.
Melese told Capital that so far the establishment capital is not so far known since it needs further studies by hired consultants, “Due to that at the current stage we don’t have a say on how much the startup capital of the securities market is or the 25 percent share of the newly coming secondary market.”
“Currently, we are prioritizing for the ratification of the proclamation and formation of the regulatory body. The other will be followed in like manner,” he explained.
Based on the country law a paid-up capital of the newly formed public enterprise is 25 percent of the total capital and the balance shall be filled in extended period.
“If the government shall manage the upcoming trading platform fully, it shall only pay a quarter of the total formation capital,” Melese explained if in case the government may fully controll the formation process.
However, few weeks ago he told Capital that there are significant interests from the private sector not only from local but well known international investors.
According to the Senior Macroeconomic Advisor, the secondary market establishment capital will be determined by the economic size and future outlook of the sector. Exchange by itself is a business that generates revenue from actors’ fee from different services it provides under its platform.
Studies that should know like how money companies shall be involved on the platform under the criteria of the security market, the economic size and long-term projections shall be undertaken in the process of establishment.
Two discussions including one public hearing has been held on the tabled draft proclamation in the past few weeks, while besides talks at the parliament different seminars and dialogues have been conducted by hosting of private firms and business organizations.
Recently on the discussion with the upcoming market, Melese told the private sectors that the commencement of capital market would have different inputs for the economy starting from the expansion of the liquidity in the economy.
“Based on different surveys of the World Bank, World Economic Forum and other local studies access to finance is indicated as a serious bottleneck for the Ethiopian economy and doing business that shall be mitigated by such kind of secondary market mainly for long term projects is essential,” he said.
Developing an alternative financial market opportunities has also a rational of market foster price discovery and promotes very important efficient allocation resources in the economy.
Mobilizing national saving would create massive liquidity which will benefit the economy. National saving, mainly the financial saving, will narrow the absence of opportunities for long terms saving in the economy.
Hard to argue that war is for the defense of people
One of the most unnerving things about analyzing politics in Ethiopia has been the need to start thinking in terms what financial analysts call “tail risk” the likelihood that events normally considered rare or unlikely will actually happen.
Five years ago, most pundits would have described as exceedingly small the likelihood of someone like Dr. Abye Ahmed a junior minister who had no political experience at all being elected prime minister. Yet it happened.
Two years ago, epidemiologists would have given a range of probabilities on the question of whether a pandemic would soon kill millions around the world in the space of 10 months.
Six months ago who would have predicted that the Federal Government would declare a state of war on TPLF?
Conditions in Ethiopia today resemble those of 1970s Ethiopia. The country is sliding for yet another civil war. Already the ties that bind us are fraying at alarming speed we are becoming contemptuous of each other in ways that are both dire and possibly irreversible.
One of the oddities of civil war is that it’s hard to say, except in retrospect, when a nation has passed the point of no return. Once you have crossed that fateful border, there’s no possibility of turning back.
Is that where we are today? For the answer to be “no” means either that one side in this devastating political conflict will simply admit defeat, or that there will be some softening of grievances, followed by a negotiated settlement. Does that seem likely?
You tell me.
What if civil war isn’t what we should be worried about but instead something different? Something like the Derg’s Red Terror, perhaps?
That’s even more terrifying. But let’s stick on the civil war issue, for now.
Looking at the deepening rift in Ethiopia between the administration of Abye Ahmed and the insurgents in Tigray the fundamentally incompatible visions of Ethiopian nationhood that the two factions hold, the huge damage already done, the scope of the humanitarian crisis, the thousands of people killed, and the implacable fury with which they grapple for every atom of power – can any of us imagine some way forward in which this Government and the people of Tigray just “bury the hatchet” and “hug it out”?
The war in Tigray will definitely tear apart the social and economic fabric of the country. The number of casualties is devastating, but the war is also destroying the institutions and systems that societies need to function, and repairing them will be a greater challenge than rebuilding infrastructure a challenge that will only grow as the war continues.
Some voices are beginning to be heard on the question of whether or not Abye Ahmed’s administration has the means to defeat the increasing insurgency in Tigray, prevent a possible conventional war with Sudan and its allies, resolve the GERD issues, halt the Eritrean forces (which cannot be labelled as pacific) from rampaging Northern Tigray, and the various internal ethnic strife and violence haunting the country today.
Is Abye Ahmed the right man to untangle this mess? While at the same time remake Ethiopian society… remold its economy… and reshape its politics?
Can he? You decide.
No matter how hard the administration tries to pacify Tigray, it will always prove to be unpredictable. The TPLF forces will certainly make sure the region remains in “not peace” condition, along with all the economic and security ramifications. As far as we know, no one has succeeded in making a country prosperous while waging a civil war.
The government and particularly the Prime Minister needs to be far more honest about the crisis in Tigray. It is far from clear how it (the Abye administration) plans to end the war. In any case, if it wins some form of tactical victory, the country still must live with the reality that follows, and purely military solutions will always account to the equivalent of cut and run. If it (the Abye administration) loses its grip, the wrath of the masses may be impossible to contain. Ethiopia with a history of cleavages and civil wars, and diverse population and socioeconomic disparity can be catapulted into Balkanization.
The question is, can this outcome be avoided?
At this stage it may require some miracle. But still, the Abye administration or the coming administration should give priority to stopping the war, first by withdrawing its forces from Tigray unconditionally and avoid, further social disintegration, political breakup, or collective nervous breakdown. Second, it should demand the withdrawl of Eritrean forces from the territories of Tigray. Third, it should seek mediation to end the conflict, and fourth it should mobilize sufficient buy-in from external actors to support the entire process.
There is no easy solution to this complex and destructive war, but if our leaders are going to follow advice our intuitions tell us that external actors play a crucial role in determining how (and whether) civil war concludes.
Don’t waste time on excuses. Do the right thing!
APPROPRIATE TAXATION
It is generally assumed those who benefit from the reigning economic system (in a given society) should pay tax. It is also assumed those who disproportionately benefit from existing setups, should pay even more taxes. But like water, capital flows to areas of least resistance. The thing is; investment in areas of least resistance might not be what a society wants at a given time and space. To encourage those who are tackling the important and relatively difficult tasks within a society, states usually devise compensatory tax regimes. If a tax system fails to properly address the various sectors of a given economy, rather equitably, rent will soon start to dominate economic activities. Beware; easy money doesn’t build character. If anything, it promotes degeneration, as is visible in many parts of the world system where parasitic oligarchs reign!
‘Unearned income’ is a phrase used to denote net revenues that accrue without much hassle. Rents of all kinds (real estate, financial, mineral, land, etc.) fell into this category. Therefore, taxes must take into consideration the light efforts expended to earn these respective (rent) incomes. In general, those who benefit from rent tend to be numerically small, yet they are politically powerful. Tampering with their interests can cause political disruption. In a society where election matters, politicians (most likely) will not get elected by promising to increase tax, especially in the urban sectors of the world system where rent is deep rooted. On the other hand, there are critical sectors of an economy where there is hardly any profit to be made. For example in Ethiopia, the agricultural sector is very important and sustains the livelihood of about 80% of our population. This sector is not lucrative, hence is hardly taxed. As a general principle, work and rent must be clearly delineated so that operators are made aware of their obligations, particularly in regards to taxation.
Earning decent income is becoming very difficult, all over the world. Without accounting gimmicks over 60% of businesses in the mature economies of the world system might not be viable. It is becoming more or less the same even in the poorer countries. It is claimed the market economy, with all its neo-liberal vagaries intact, operates more brutally in the peripheries, than in developed economies, mostly due to institutional weaknesses and out right corruption. Be that as it may, the tendency of profit to decrease over time is one of the defining tenets of modern capitalism. We will not go through the ‘whys’ of this important thesis; suffice is to say, this phenomenon is what renders many a business (old and new) non-viable. The current deafening war drum by dominant interests is a direct consequence of the accumulation problematic! In the above, we single out crony capitalism, as it is a different animal altogether. The motto of crony capitalism is akin to the Orwellian story; ‘…all animals are equal but some are more equal than others.’ If truth be told, one is not actually talking about genuine business activities/operations in crony capitalism, but rather planned extortion, which takes place in broad daylight in cahoots with the power that be (TPTB)! The classic examples are our own recently minted parasitic oligarchs, who are uniquely allowed to access public/private resources while impostering as market operators!
Taxation regimes can distort markets and lead operators astray. The practice of allowing interests to be deducted from income; or in other words, interests to be considered as business expense, has led to the destruction of many a company. The so-called private equity funds tend to leverage this reckless business strategy to their advantages. These entities usually buy a relatively healthy company and saddle it with massive debt. The interest on the debt is allowed as expense. So long as the company can service the debt, it might be considered ok, but it certainly is not as healthy as it used to be before the buyout. These vultures run away with the accessed loan while the balance sheet of the company is systemically ruined. Studies have shown that by eliminating interest deductibility (in a regime of 35% income tax) the corporate income tax rate is effectively reduced to around 15%. By not allowing interests to be deductible, states can also help create viable and resilient companies! Naturally one of the resistors to this scheme, even though it is gaining wider acceptance, are the banks. No surprise here! The alpha and omega of bank’s or their raison d’etre, is to peddle loans. These loans, created out of thin air, make the banks plenty of money in form of interests, to say nothing about their accumulation of wealth by stealth!
Excessive debt is what ails most economies, including ours. Unless our attitude towards debts changes, situations will only get worse. “Change is never painful. Only resistance to change is painful.” Buddha. Good Day!
